Posted by: Mark Gimein on January 10, 2012 at 7:00 AM

On the surface, the best news in last week’s generally positive employment data was the big fall in the number of “discouraged workers”—folks who want work but have stopped looking because they don’t see any jobs. From December 2010 to December 2011, that fell by 373,000, a big 28 percent year over year drop.

Figuring out what exactly this means is no simple thing. All the old cliches about statistics are doubly true about labor force data. If you’re looking for work, you’re “unemployed.” If you’ve stopped looking, you’re “discouraged.” But if you haven’t looked in the last year at all, you’re no longer “discouraged.” You’re not counted in the labor force. So what happened to all those discouraged workers? Did they find jobs? Or drop out of the labor force altogether?

Unfortunately the best bet here is door number two. The thing about discouraged workers is that they are (by definition) not looking for jobs, so they tend not to find them. Since December, 2010, the labor force participation rate has crept down by 3/10 of a percentage point, going from 64.3 percent of the population to 64.0 percent. That sounds like a small number, but it adds up to a lot of workers: if the labor participation rate had stayed the same, 815,000 more Americans would be working. That’s more than twice the decline in the number of discouraged workers.

Derek Thompson at The Atlantic has already pointed out the falling participation ratio. Thompson thinks (or hopes?) that as the economy improves the participation rate is likely to go up. Or, says Thompson, the long-term unemployed who’ve fallen out of the workforce

will represent a kind of permanent shadow-group of people neither working nor counted as unemployed.

Alas, that sums up the actual situation pretty well. My own father never recovered from losing his job in the early 1980s. For him, as for many others, unemployment faded into an awkward and uncomfortable retirement, while my mother went to graduate school and became the primary breadwinner. I may be biased by my own family’s experience, but that seems to me to be a fairly common experience.

The economy is clearly getting better. More folks are getting jobs, and fewer are moving into the discouraged pile. Bloomberg’s Timothy Homans reported yesterday the sharp drop in the number of underemployed—those who’ve had work, but not a full-time job. Those are the people who are in a position to benefit from the improvement. For those who did not manage to hold on to a part-time job, blew through their unemployment benefits, and gave up looking, there is no clear way back. The fall in the labor force participation rate seems to confirm what a lot of folks have suspected: that the path from long-term unemployment to discouragement to permanent joblessness is a more or less one way street.

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"The Wealth Debate" is a running discussion of wealth, poverty, the economy and income inequality in the U.S. and the world. It was started shortly after the Occupy Wall Street movement sparked a global protest about the fallout from the financial crisis and money in politics. You can reach the editors, Dan Beucke and Mark Gimein, by email, or follow BloombergNow on Twitter to keep up with posts.

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